Functions of the equity markets (2)
- Primary function
- Secondary function
Primary function
Enables companies to raise new finance by communicating with large pool of potential shareholders
Secondary function
Enables shareholders to sell existing shares
Three different types of analysts
- Buy-side analysts - large institutional investors
- Sell-side analysts - investment banks
- Independent analysts
Why seek a stock market listing? (4)
- Access to wider pool of finance
- Improved marketability of shares
- Enhanced public image
- Easier to seek growth by acquisition
Initial public offering (IPO)
Offer to sell shares in company to public for the first time. Can be existing shares owned by founders of business to realise profits, or new shares to raise additional capital (or both)
Stages in IPO > Stage 1
Company appoints investment bank as lead manager (primary responsibility for IPO process)
Stages in IPO > Stage 2
In larger issues, may need a syndicate of banks. Usually also underwrite (insure) the issue.
Stages in IPO > Stage 3
Company will be valued by the investment bank using a range of methods
Stages in IPO > Stage 4
Prospectus is drawn up and issued. Sets out details of company, financial statements, management information, trading history, business plan and reasons for IPO.
Stages in IPO > Stage 5
Issue is publicised and underwriters assess demand for shares. Fixed price set (offer for sale) and allocation procedure is agreed
Stages in IPO > Stage 6
Underwriters usually provide support after shares have been issued by acting as market makers, quoting bid and offer prices to market for shares. Ensures efficient and liquid market.
Methods of issuing new shares (3)
- Public issue
- Placing
- Rights issue
Public issue =
Direct offer from the company to the public of the shares at a fixed price (usually advertised in a newspaper)
Public issue advantages
- Company sells shares itself
Public issue disadvantages (3)
- Expensive and time consuming (preparing and filing prospectus)
- Risky (lack of guarantee)
- Normally underwritten - adds to cost
Private placement =
Shares sold privately to clients of the investment bank at a fixed issue price
Private placement advantages (2)
- Simpler
- Cheaper
Private placement disadvantages (2)
- Not underwritten
- Control can be passed to small number of institutional investors therefore could wield more power than under an offer for sale
Rights issue =
Company offers further shares at a given price to existing shareholders in proportion to their existing holding. (Therefore overall proportion of shareholding remains the same)
Pre-emption rights
Built into Companies Act (2006 - when company wants to raise more capital through further issue of shares, they are obliged to offer the new shares to existing shareholders
Pricing a rights issue
Price of new shares will be at discount to current share price in order to encourage shareholders to take up rights or sell them.
Also acts as safeguard in case market price of shares falls before issue is completed
Effects of successful rights issue (4)
- New shares are created, reducing the gearing ratio of the company
- New finance is raised for the company
- Total value of the whole company should be increased by extra finance raised
- Price per share will fall
Rights issue > Stage 1
Discuss possibility of rights issue with merchant bankers
